Yesterday’s selloff was triggered in part by a weak ADP report, and fears of a broader economic slowdown.

Lets see if we can navigate the crosscurrents here to discern what, if anything, is happening.

First off, the economy is slowing. At least, the 2nd derivative rate of growth is throttling back, from over 3% GDP in several 2010 Qs to under 2% now. That much we know, and it lends some credence to the belief that QE3 is inevitable. I am far more uncertain about QE3; it really depends how slow things get and how much the Fed panics. But we do know QE2.5 — the reinvestment of the rolling maturities of QE2 — is a done deal, and that is somewhat supportive of equity prices.

Second, we also know the ADP numbers are suspect at best (See this, this and this). They seem to do better at forecasting BLS numbers later in the economic cycle when job creation is dominant at established, larger firms — their client base — than in the early parts of the cycle when it is the new start-ups driving job creation.

ADP also does better following the revisions and benchmarking — suggesting that they may be more accurate than they appear when the payroll numbers are first released. That is almost a non-issue, as the anticipation of BLS numbers, warts and all, is what drives trading.

Last, we have two cyclical factors fighting it out: The negative “Sell in May” theme is up against the positive “Presidential 3rd year” factor.

The bottom line remains this is a challenging set of conditions to navigate. Our 30% cash position reflects that . . .

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “ADP’s Job Data Reliability? Not Great . . .”

Navigating this economy is tantamount to navigating your way to a bathroom (when you should be headed for the poop deck) on the Titanic, after it hit the iceberg.

In the big picture, the ship is going down.

To stick with the analogy (sorry):

We rammed the ship that is our economy into the iceberg of bad/unrepayable debt (if only by virtue of a money supply — fiat, no less — inadequate to pay the accrued debt, plus interest). We saw it coming, and increased speed, as our ship was unsinkable.

As water poured through the hole caused by the iceberg, it was decided by Upper Management (fully insured against loss), and The Officers aboard the ship (who would do anything, regardless of ethics, logic, or established protocol to keep their jobs), that another, larger hole should be created in the back of the ship, in order to allow the water coming in the front of the ship to drain out.

As a result of the increased volume of water now flooding in, it was decided that the first drain hole wasn’t big enough, so a second was created, posthaste, along with contingency plans for a third (plans for the third hole were not announced to the passengers in second class through steerage, as acknowledging such could be construed, by clueless non-professionals, as a signal that something might be wrong).

In the meantime, upper class passengers and the Officer contingent manned and launched the (actually, their) lifeboats.

And everybody else?

They’re not too concerned, as they trust that the guys running the ship know what they’re doing, and the ship is, after all, unsinkable.

Rosenberg recently suggested QE3 could end up being something called Twist2 or something like that. It would involve the Fed buying only 10-year notes in QE3, thereby locking down the long end of the curve. QE2′s average bond term was 3-years, so this would be an effort to keep real estate, business, and consumer loans at low or even negative yields.

My guess is QE3 runs from Jan. 2012 through August 2012, with an announcement in October 2011 to set a bottom for a summer/fall correction in the equity markets.

sell in may has a stat basis
Presidential third year has a past stat basis
but this time what can the admin do to deliver on their devout economic wishes?
th Rs run spending, the Fed has to taper back..
and the Rs are happy to make a mess with next year in mind
while looking like they are trying to help?

Even if ADP were off by 100%, the number would still be less than half of most bearish forecasts. GS and C both reduced their May job numbers near 2 to 3 sigmas after the ADP report:

“The ADP number suggests that we’ll see a weak payroll report on Friday, and it’s very possible that soon people will be reducing their GDP forecasts,” said Tim Speiss, head of personal wealth advisers at EisnerAmper in New York. “We could see some additional contraction.”

Goldman Sachs cut its estimate, saying employers added 100,000 jobs in May versus an original estimate of 150,000. Citigroup cuts its forecast to 100,000 from 170,000.

NFPs have far more influence on markets (short-term volatility creator), but it is the worst employment indicator to be looked at.
The volatility of the number itself and its revisions is massive. It should be taken with a grain of salt.

What I like to look is actually the Jobless Claims which have a much smaller vol, much smaller revisions and the seasonal adjustments/birth-death model impact on it (4-week average) is clearer.

My personal take is that program managers could rationalize the QE1 as being absolutely required in order to respond to a once in a lifetime economic collapse and that QE2 was necessary to tweak the economy a little more and do some mopping up. However, the prospect of a third incarnation looks a lot like a long term continuing entitlement program that has no discernable end point. QE3 appears to be difficult to defend with a straight face.

[...] is the ADP private payroll number. It was enormously disappointing. But as we noted yesterday, ADP’s job data reliability is not especially great. Indeed, given their large firm bias, I would expect it to less than ideal during the early [...]

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Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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